Was Charles Schwab a simpleton when it came to auction rate securities?

Was Charles Schwab a simpleton when it came to auction rate securities?
Was Charles Schwab a simpleton when it came to auction rate securities?

Tomorrow, July 21, 2011, yet another court appearance will take place in the long-running case People of the State of New York vs. Charles Schwab & Co., Inc. (WebCivil Supreme index 453388/2009).

Having convinced its lap-dog regulator FINRA to look the other way, the only thing left between getting away with auction rate securities fraud and having to make good on its misrepresentations to little guys like me is this case brought by the New York state attorney general.

As I have occasionally thundered about on this blog, Schwab has been hiding behind “principle” since the case was filed in late 2009, asserting it was just the victim of other players in the marketplace and that as a “downstream” seller of these toxic assets, it should not be held liable for selling them.

Coupled with its, ahem, principles, it has delayed and delayed and delayed the NY AG’s case. First, by trying to move it to Federal court — a move it lost — and then by slowing a determination on its own motion to dismiss the charges.

The motion to dismiss was filed in March, 2010. Between then and now, the motion was heard once. There have been 11 adjournments. Apparently, a change in judges is at least partly responsible for the delays. But it’s pretty clear that Schwab doesn’t intend to settle and that delay, despite the continuing pain of people with illiquid auction rate securities, works to Schwab’s advantage.

In reviewing the case documents available on eTrack, I ran across the NY AG’s response to the motion to dismiss. Originally filed in May, 2011, its introduction is a must-read for anyone who is interested in this case and its impact. Here is the entire document.

But you only have to read these short excerpts to understand in a New York minute how vapid Schwab’s stand on “principle” is.

…Schwab claims to have had a limited role in the ARS market, and that it somehow was a victim of the practices of the major underwriter broker-dealers whose ARS Schwab distributed to its customers. If Schwab truly was such a simpleton in the marketplace as it suggests, then it was reckless in selling products it did not understand. But the evidence alleged in the Complaint belies any claim by Schwab that it was unaware of the risks in selling ARS.


At base, this motion is another attempt by Schwab to delay adjudicating the case on the merits, and, more importantly, doing something to alleviate the suffering of its customers who continue to experience illiquidity for twenty-eight months and counting since the failure of the ARS market.

On behalf of all of us who’ve been robbed by Charles Schwab, I want to thank the NY Attorney General for making such a logical and crystal-clear argument for the court to consider. I hope tomorrow the judge will agree, rule against Schwab’s ridiculous motion to dismiss and allow the case to proceed.






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